The burden of being public

Pressures may be dissuading IPOs: professor

The market chatter is that 2017 is expected to see a number of initial public offerings, the process where a private company invites, for the first time, the public to buy a stake.

The talk is that pipeline is building — with Freshii Inc. already having filed documentation to go public — and that companies from a variety of sectors will make their way to the market this year.

But if at the end of 2017, there have been a slew of IPOs then it will be a marked change from recent years. J. Ari Pandes, an assistant professor of finance at the University of Calgary’s Haskayne School of Business, demonstrated that decline — and the possible reasons in a recent presentation.

First the numbers: Over the period 2001-2015, on average there were 15.9 TSXlisted IPOs a year by operating companies — about 40 per cent of the 41 a year on average that were completed in the period 1993-2000. Over those two periods, energy IPOs also fell to on average 2.9 a year from 5.3 a year.

While the average median IPO proceeds rose (to $104 million from $42.1 million) the average aggregate proceeds fell, on average, to $2.2 billion from $4.9 billion.

Those numbers parallel the experience in the U.S. where over the same two time periods, there were 111 a year, on average, compared with 458 a year earlier.

For the U.S., Pandes listed a set of factors that help explain the slide: regulatory overreach (including the Sarbanes-Oxley Act of 2002 that increased compliance costs); the U.S. litigation climate; changes in market structure (including the so-called tick rule where spreads between bid and ask narrowed, making it tough for market makers to make enough of a return, and the imposition of Reg Fair Disclosure); and the possibility of “fundamental economic change” whereby small technology companies sell to the big players rather than go public.

But Pandes, whose research over the years has focused on IPOs and capital markets, argues that “none of those (U.S.) reasons” apply to Canada. And the Canadian declines have occurred at the same time, as there have been “massive increases in the price of nearly every commodity Canada produced in the 2000s,” he said.

So what’s at work? Pandes advanced the argument that the declines in IPOs are a function of “public market pressures.” Pandes hypothesized that “we may have gone too far in the alignment of incentives” between management and shareholders.

He argues that much time and effort has been spent on getting management to act in the best interests of shareholders — the so-called principal-agent program.

Pandes wonders whether an environment has been created “where shareholders are putting too much pressure on the management team.” He notes the role of “activist, short-term shareholders” that scrutinize and analyze every decision made by management.

In such an environment — of trying to keep all parties happy against the backdrop of quarterly financial reporting — Pandes said management has “lost sight” of the long term.

“We may want to move (to a situation) where management focuses on the business rather than all the external gate keepers.”

For Pandes, the question is whether management “is just fatigued with the public market and whether they are wanting to stay private to avoid all the stresses that go along with being a public company.”

Pandes noted there is some “anecdotal evidence” to support that hypothesis, including an “informal online survey” by Fortune whereby chief executives expressed, by a three-toone margin, the view that it would be easier to manage the company if it were private.